Minimum effects

Posted
on February 16, 2013, 4:02 pm

In his State of the Union addresss on Tuesday, President Obama proposed increasing the federal minimum wage as part of a broader agenda to support the middle class. The next day, CEPR released a report (pdf) I had (with great serendipity) recently finished reviewing the large body of research on the employment effects of the minimum wage.

One of the most puzzling empirical questions in labor economics is how it is that researchers consistently find large positive effects of minimum wages on the earnings of low-wage workers, but little or no effect of minimum wages on the employment prospects of the same low-wage workers.

My new report focuses on two aspects of the minimum wage that might explain this apparent paradox. First, in the scheme of things, minimum-wage increases are fairly small economic events. Whether measured as a share of total costs facing employers (labor and non-labor costs, such as energy, rent, interest payments, etc.), or just total wage and benefits costs of all employees, or even just the wage costs of low-wage workers themselves, minimum-wage increases are just not that big of a deal.

Second, as economists Barry Hirsch, Bruce Kaufman, and Tatyana Zelenska have argued (pdf), employers have many possible “channels of adjusment” at their disposal. One of these is to cut employment, which is where most of the economics research has focused. But, my new CEPR report reviews evidence for and against 10 more possibilities, including increasing operational efficiency, reducing turnover costs, reducing hours instead of employment, and many others.

The report has received some good press, including this nice summary piece by Brad Plumer at the Wonkblog and this post by Paul Krugman.